Fannie Mae: Expect Fed rate hikes in June and December

Economic growth will remain limited in 2016

Despite the Federal Open Market Committee announcing earlier this week that it felt that current economic conditions did not warrant another increase of the federal funds rate, Fannie Mae’s Economic & Strategic Research Group still expects that the FOMC will increase rates at least twice in 2016.

According to Fannie Mae’s March 2016 Economic and Housing Outlook, economists at the government-sponsored enterprise expect the FOMC to raise rates in June and December, despite “flat” economic growth in 2016.

“Financial market conditions appear to be improving as 2016 progresses, but economic growth is expected to remain flat at 2% this year," Fannie Mae’s report states. “Weakness in net exports and oil-related nonresidential investment, as well as the ongoing inventory correction process after unsustainable accumulations during the first half of 2015, should combine to drag on growth.”

Despite those headwinds, the economy isn’t without its positive indicators, the report shows.

According to Fannie Mae’s report, “strengthening domestic consumer and business spending and a healthy labor market” should help to outweigh the negative factors.

“We see lingering effects of the strong dollar, low oil prices, and soft overseas demand creating a drag on economic growth,” said Fannie Mae Chief Economist Doug Duncan.

“However, the economy appears to have regained some footing after a slowdown in the fourth quarter of 2015, as stocks bounced back and oil prices have risen amid a strengthening labor market,” Duncan continued.

Duncan added that the current labor market and inflation conditions continue to support Fannie Mae’s expectation of a federal funds rate hike of 25 basis points in both June and December.

“A less optimistic outlook for future wage gains, especially among small business employees, coupled with continued strong home price appreciation boosted by lean inventory, is adding to the housing affordability challenge,” Duncan said.

“Our latest Home Purchase Sentiment Index shows that high home prices are a top reason for consumers’ perception that it’s a bad time to buy a home,” Duncan continued. “However, low mortgage rates should help support moderate housing expansion as we move through the year.”

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